In addition to his demand that the UK reclaim control of its fishing waters, Farage called for the country to leave the Single Market and for the reintroduction of blue British passports. While evidently a quaint, proxy argument for the imposition of tougher border controls, the question of “passports” does have a broader significance in the context of financial services, with controls on freedom of movement seemingly incompatible with continuing membership of the Single Market and, thus, access to passporting rights under EU law.
The risk to UK-based firms of losing the financial passport which permits simple and largely unconditional access to clients and investors in the EU has been discussed in great detail in the months leading up to and following the referendum result. A lot of the debate, however, has centred around the impact on foreign financial institutions which use the City as their base for accessing the EU. While it is true that non-European banks would face considerable operational and regulatory challenges in the event of a “hard” Brexit, these issues would likely prove resolvable in time as many firms choose to establish subsidiaries or substantially move operations to another EU member state.
The broader impact of a hard Brexit may, therefore, ultimately be felt most keenly in the context of UK banking.
As a general matter, UK banks which derive the majority of their income from activities in the UK are unlikely to be immediately impacted by Britain’s departure from the Single Market and will perhaps not even be directly impacted by the loss of passporting. Upon closer analysis, however, one can begin to identify a number of significant challenges for the UK banking sector.
With the prospective negative outlook for GDP growth and despite ever-expanding central bank support, the first instincts of UK banks will likely be to protect their balance sheets.
Constrained lending (particularly to sectors historically reliant on EU trade), decreasing trading volumes due to concerns surrounding regulatory equivalence and the future of the €500bn euro-trading market, as well as decreasing demand from those sectors most exposed to a weakened UK economy are all likely to prove both a drag on revenues in the short term and may lead to greater asset impairments in the longer term. There may also be implications for foreign staff, for whom concerns around obtaining work permits or, more generally, the attractiveness of the UK as a place to work and live may begin to manifest.
Both RBS and Lloyds identified Brexit as a material risk factor in their 2015 annual reports. RBS, in particular, may face considerable challenges in the event of a hard Brexit. Continuing uncertainty around the European Commission-mandated divestment of Williams & Glyn, issues surrounding Ulster Bank and its ability to continue servicing clients in the Republic of Ireland, as well as further political uncertainty regarding Scottish independence all represent a very testing environment for the bank.
It is also worth noting that the UK taxpayer’s current combined stake in RBS and Lloyds currently stands at approximately £85bn, a sum 10 times larger than the UK’s current net annual contribution to the EU budget. While the government will rightly be concerned by the impact on the wider economy of decreasing tax revenues and constrained economic growth caused by reduced banking activity, any risk that further fiscal support for these institutions may be required is likely to give the chancellor sleepless nights.
It is not entirely surprising that the reintroduction of a blue passport has become something of a symbolic rallying point for those demanding a swift and unconditional Brexit. On the face of it an uncontroversial, if slightly whimsical, proposal, the implications should however be made clear. Following a contentious referendum campaign where exaggerated claims and outright falsehoods were traded liberally by both sides, the UK public must now be presented with a much more mature discourse on the direct economic and financial implications of pursuing a hard Brexit.
Otherwise, we may wake one day to discover that the UK, having traded one passport for another, has come to find itself stranded.